Misdeeds and Risky Loans Led to Florida Bank Failures

Most executives say the failures were not their fault. They blame a tanking economy. Or meddling government officials.

By MICHAEL BRAGA & ANTHONY CORMIERSARASOTA HERALD-TRIBUNE

Almost 70 banks failed in Florida during the past five years.Most executives say the failures were not their fault. They blame a tanking economy. Or meddling government officials. Or people who borrowed more than they could afford while the market was cooking hot.But these bankers are wrong.At least half of Florida's community banks failed because their leaders were greedy, arrogant, incompetent or sometimes corrupt, a Herald- Tribune investigation found.The newspaper obtained previously confidential state records that show how failed bankers broke the law, manipulated financial documents and gorged themselves on insider deals. These bank records had never before been collected by an American newspaper.Sixty-eight banks failed in Florida since the Great Recession began, second-most to Georgia, and the misdeeds were found in communities all across the state.In the farm town of Immokalee, Florida Community Bank executives lent millions of dollars to mob associates while a terrorism financier moved money in and out of its vaults.In the Panhandle, Coastal Community Bank bought an insurance company from the chief executive's son and sold it back to him three years later at a $900,000 loss.At First Commercial Bank of Tampa Bay, employees were so fearful of the chairman that they met privately with state officials and told them of secret dealings, altered documents and questionable loans.Not all of the failed community banks have been accused of wrongdoing. Some made sensible loans and were undone by borrowers who took on too much debt during the real estate boom and couldn't repay.But banking's worst offenders made insider loans and business deals to enrich themselves at the expense of their own banks and, ultimately, the public. Other banks lent millions of dollars to mobsters, drug dealers, convicted felons and developers with prior bankruptcies.In flush times, as Florida's real estate prices soared to new heights, bankers rewarded themselves with large salaries and generous dividends. One local banker used a private airplane to fly across the country while others held meetings at lavish beach resorts.Regulators saw this behavior but often they were too timid to act while the economy was humming. When regulators did object, bankers ignored the warnings, hid important documents, removed conversations from board minutes and doctored financial reports to make things seem better than they were.Even after home prices fell and hundreds of thousands of Floridians stopped paying their mortgages in 2007, many bankers forged ahead — continuing to make risky loans and payments to themselves as their banks lost money.Most of the failures in Florida involved community banks, small institutions founded to serve local customers.Community bankers are vital to small cities and towns as a source of money to build new shopping plazas, office buildings and neighborhoods.But some outgrew their local roots to become large and unwieldy. They made loans far beyond their home turf with inexperienced employees handling complex real estate transactions.In all, the failures cost the Federal Deposit Insurance Corp. more than $11 billion to clean up. The exact cost to America's local economies is unknown but clearly felt.The fallout is seen everywhere: in the ruined credit of Americans who walked away from homes they could no longer afford; in cities like North Port and Lehigh Acres, beaten by wave after wave of foreclosures; in stagnant wages and frozen credit; in the millions who still struggle to meet the rising costs of milk and eggs and bread.Even with clear evidence of wrongdoing, few bank officials will be arrested or charged with a crime.Many more still work in the industry today. Just six banks have been sued by the federal government, while 10 others settled out of court — with insurers covering the damages.To investigate the reasons for Florida's bank failures, the Herald-Tribune obtained state banking reports that had never before been made public. The documents are so secret that even federal judges have kept them sealed in court filings.But these examinations become public record one year after a bank fails thanks to a law passed by the Florida Legislature in 1992. No other state permits access to such reports until at least 50 years after a failure. In 44 states, bank examinations are either destroyed or permanently sealed after an institution fails.The newspaper collected 3,000 pages covering 40 of the banks overseen by the Florida Office of Financial Regulation. It also built a database of nearly 400,000 mortgage and foreclosure records and reviewed 25 reports published by the FDIC Office of Inspector General.Reporters visited a dozen counties and conducted more than 90 interviews with bankers, borrowers, regulators and analysts.Among the newspaper's findings:Thirty-four of the 68 banks broke federal or state laws, ignored repeated warnings from regulators, had high amounts of insider loans or made risky bets on customers who clearly couldn't repay their loans.Banks lent more than $400 million to borrowers convicted of crimes, indicted by federal prosecutors or dogged by a past bankruptcy. These were not mortgages for people to purchase homes, but development loans to buy land and build on it. Each loan went into default.Florida Community Bank, for example, lent $8 million to a company partly controlled by Leonard Mercer, identified by New Jersey law enforcement as a "front man" for the "Little Nicky" Scarfo crime family.Twenty-one banks engaged in some form of insider dealing. Although these transactions were not illegal, they raised questions from regulators about conflicts of interest. Banks leased property from executives, bought cars from dealerships owned by directors, provided jobs for relatives and subsidized sister companies owned by insiders. At Ocala National Bank, directors started their own mortgage company, lost $1 million and persuaded the bank — by threatening a lawsuit — to pay them off.More than 200 loans to insiders were never repaid, and regulators scolded 17 banks for lending more to officers and directors than was legal. In Port St. Lucie, the adult children of Riverside National Bank's chief executive borrowed $3.8 million. The bank wrote off the losses when they did not repay.Eighteen banks paid a dividend to investors during years they lost money. Essentially, these banks were giving out cash that they could have used to cover growing problems created by foreclosures and the collapse of the housing market. Naples-based Orion Bank paid out $28 million in 2007 — the same year it lost $6.1 million.Bankers ignored a declining real estate market and warnings from regulators to slow down. They made some of their biggest loans after the slump took hold, and provided borrowers additional cash to keep up with their payments. Sarasota's Century Bank lent more than $70 million to just 10 borrowers in late 2006 and early 2007. One of these borrowers had already spent time in prison; three others would later do the same. All of those loans went into default.Only three people have been charged with crimes related to their banks. Orion CEO Jerry Williams was imprisoned for lending money that was later used to buy stock — a practice meant to fool regulators into thinking a bank has more capital than it actually does. Four other banks — Florida Community Bank, First Priority Bank, Lydian Private Bank and Community National Bank of Sarasota County — were accused by regulators, shareholders or employees of similar behavior. No one has been prosecuted."Bankers operated like riverboat gamblers," said Jack McCabe, a Florida real estate consultant. "They threw caution to the wind to prop up their bottom lines. The country suffered, but very few have been brought to justice."And it could happen again.In Florida, the government has undertaken no studies to examine why so many banks collapsed nor has it written any new laws to prevent similar failures in the future.In fact, the state has moved to further deregulate the industry, with managers appointed by Gov. Rick Scott cutting 10 percent of employees in the Division of Financial Institutions and closing half of the regulatory offices across the state.Top financial regulators vow to give bankers more freedom — even when history suggests that without oversight, they take risks that ultimately hurt themselves, the economy and ordinary Americans.The newspaper spoke with more than two dozen bank leaders and all but one said their banks closed because of forces beyond their control — meddling by the government, the real estate downturn or homeowners who stopped paying their bills.Florida's top regulator agrees with them.Instead of faulting bankers, Drew Breakspear, the head regulator in this state, attributed the failures largely to homeowners who were "out of their league in terms of their spending habits."But that analysis is flawed.The newspaper found that many banks encouraged borrowers to fudge their incomes to qualify for bigger mortgages. And most Florida institutions went under because of multimillion dollar loans to real estate developers — not to average home buyers.

QUESTIONABLE ETHICSPeninsula Bank showed all the signs of a troubled institution.It lent millions to developers whose behavior should have raised red flags. A property flipper who later went to prison. An attorney suspended three times from the Michigan bar. A builder sued four times for copyright infringement. And six developers with a past bankruptcy.None of those people would ever repay their loans.Peninsula also dealt with dubious customers in other areas of the bank. A money launderer moved cash in and out of its vaults. A jury found that it lent $10 million to a man running a Ponzi scheme. Mortgage records show that it also lent millions to insiders. And during its final months, state examiners say a director accused the CEO of using accounting tricks to hide information from regulators.Peninsula failed in June 2010, costing the FDIC $195 million.Once a small bank based in Charlotte County, Peninsula took off when Simon Portnoy entered the picture. In 1995, Portnoy led a takeover and grew the bank from just two offices and $50 million in assets to a statewide real estate player with 14 branches on both coasts and $650 million in assets.As home prices rose, Peninsula soared.But below the surface, the bank's growth was fueled by loans to people with questionable ethics or past financial problems.In particular, Peninsula lent nearly $50 million to developers who had once declared bankruptcy and later sought money to invest in raw land, develop golf course communities, buy office buildings and erect everything from town homes to hotels across Florida.A company controlled by Miami Beach developer Mordechai Boaziz received nearly $9 million from Peninsula in August 2006 to finance the renovation of a Tampa hotel even though one of his companies filed for bankruptcy two years earlier. He also was in the midst of a federal lawsuit in which former partners accused him of misappropriating $8 million from a hotel business in the Midwest.Boaziz denied the allegations in court and the case was ultimately dismissed. Boaziz defaulted on his loan from Peninsula in December 2009.Other questionable loans included: $6.25 million to a company controlled by David P. Hickey, a Michigan attorney suspended for failing to repay a loan to a client; nearly $10 million to companies managed by James W. DeMaria, a Spring Hill developer who was accused four times of copyright infringement and later settled the cases in federal court; and $1.6 million to John Yanchek, a Sarasota attorney later imprisoned for illegal property flips.All of those loans went into default.

CASH FOR TRASHThen there was James Bovino.The founder of a bank in New Jersey and a real estate developer with projects in six states, court records show Bovino already owed hundreds of millions of dollars to other institutions when he took on even more debt from Peninsula in 2008.The bank lent him $12 million despite the fact that the world financial system was on the verge of seizing up and companies Bovino controlled in Arizona and New Jersey had filed for bankruptcy just a few months earlier."Remember what's going on at this time," said Raymond Vickers, an economic historian and former regulator. "We're talking October 2008. No other bank in the country is lending money."The loan was one that bank analysts call "cash for trash." State examinations show Peninsula had foreclosed on 200 acres in Port St. Lucie just a few months earlier, and was anxious to get the land off its books. So it transferred the property to Bovino at no cost and provided him with $12.1 million.The transfer seemed to benefit the bank because it made it look like Peninsula had replaced a bad loan with a good one. But state regulators said the transfer violated federal accounting rules and complained that Bovino did not have to put any of his own money into the deal. They said nothing about his bankruptcies."No prudent banker would make such a loan," Vickers said.Bovino eventually defaulted.

RECKLESS BEHAVIORAgain and again, Peninsula seemed to do business with people whom it should have avoided.One depositor pleaded guilty to money laundering, regulators found. Another customer was Robert Bentley, the investment adviser who pleaded guilty to orchestrating a $380 million Ponzi scheme.In June 2006, a federal jury found that a senior vice president at Peninsula — and the bank itself — had assisted Bentley's operation. Jurors said that Peninsula vice president Joseph Marzouca helped the scheme stay afloat by providing money to a company controlled by Bentley when his investors demanded they be paid.A jury ordered Marzouca and the bank to pay $13.1 million in damages, but the decision was overturned on appeal. An appellate court ruled that Marzouca and the bank were not responsible for the Ponzi schemer's actions.Marzouca remained in the industry and became CEO of Davie's Floridian Community Bank in 2008."The receiver tried to make more out of it than it was, and the jury was influenced by that," Marzouca said. "That's why we appealed and the three judges on the appellate court ended up throwing it out."Meanwhile, Peninsula insiders were helping themselves to the bank's money.In 2009, long after the housing boom, Peninsula had nearly $18 million of insider loans on its books — up from just $5 million two years earlier and enough to rank it among the top five of all Florida banks that failed during the Great Recession.Most insider loans are not illegal and are not necessarily a bad thing for a bank, but they can be an indicator of reckless behavior by executives, officers and directors because they are not "arm's-length transactions" — meaning it is hard to tell whether the insider is getting a better deal than an ordinary customer might."Why do insiders need to borrow from their own banks?" Vickers said. "If they've got good credit, why not go across the street?"With losses mounting, Peninsula began to cut corners.State officials found that executives were slow to write down bad loans, making the bank seem healthier than it was. In August 2009, three out of every four bad loans were less likely to be repaid than the bank reported. Peninsula should have moved $14 million out of its capital reserves and into a fund to protect against losses, regulators said.Within the bank, dissension began to bubble up. One insider started wondering whether the CEO was hiding important information, according to regulators' reports.Portnoy, the CEO, refused to downgrade struggling loans, a director said in a private meeting with the state, and tried to give extra money to customers who were already behind on payments.When pressed by directors, Portnoy said he could "fire" the entire board if he wanted to, because of an agreement that gave him and two other shareholders special voting rights, according to a regulatory report.The discord boiled over in June 2009, when board member Marcus Faust successfully lobbied for Portnoy's removal while accusing him of "falsifying, or at least distorting" important bank records."The validity of Mr. Faust's allegations is unconfirmed," state officials wrote.No one from Peninsula has been charged with a crime. But the FDIC sued Portnoy and nine of the bank's officers and directors in April, accusing them of gross negligence in their management of the institution.Officers and directors "blindly approved loan transactions despite numerous, repeated and obvious violations of the bank's lending policies and procedures, banking regulations and prudent banking practices," the FDIC suit says.Portnoy did not return three calls for comment.An attorney representing Peninsula's directors denied the government's allegations and said the bank failed because of the real estate slump, not board members' decisions.

NOT IN OUR STARS ...Even the federal government has acknowledged that wayward bankers were responsible for the global crisis.A 600-page report by the Financial Crisis Inquiry Commission borrowed a quote from Shakespeare when it came time to assign blame:"The fault, dear Brutus, is not in our stars, but in ourselves."The crisis could have been avoided, had the system not been choked by risky mortgages, dangerous investments, a lust for growth and regulators too meek to put a stop to it all, the commission said.According to a separate report from the FDIC, examiners reacted slowly and "had difficulty restricting risky behavior while institutions were profitable."In some cases, the FDIC's inspector general said, regulators knew about problem banks that had repeatedly broken the law and still took little or no action against them.The FDIC has sued officials at six failed banks in Florida, claiming gross negligence. Officers and directors at 10 others have settled out of court by agreeing to pay the FDIC nearly $17 million from insurance policies. Even other bankers questioned some of the decisions — both by executives and regulators — during the boom and the crash.Jody Hudgins, a veteran Sarasota bank executive, saw counterparts who tried to build their institutions as fast as they could with an eye toward selling them off to out-of-state companies seeking a foothold in Florida.From 1994 to 2008, more than 230 new banks started in the state. This ramped up competition for customers and experienced staffers."There were just too many banks," said Hudgins, who now serves as chief credit officer for First National Bank of the Gulf Coast in Naples, "and not enough really good bankers who had been in the business for 25 to 30 years and had experienced all the different kinds of crooks and what they can do to you."Meanwhile, there was increased pressure to find good customers. With fewer and fewer options, some bankers turned to borrowers with bad credit, past jail time or clear evidence suggesting they would never make good on the debts.In many cases, making loans to people with questionable backgrounds was a conscious business decision, according to Bill Black, a University of Missouri professor and former Savings & Loan regulator. It was a strategy used by banks and thrifts during the run-up to the Savings & Loan crisis of the 1980s and early 1990s, Black said. This allowed lenders to make more loans and book higher profits than they might have through the more arduous task of finding creditworthy borrowers."Making money in banking is really hard," Black said. If a bank wants to grow by making good loans, it has to seek borrowers with the best credit histories and compete for their business by offering the lowest possible interest rates.But if a bank focuses on making loans to borrowers with poor credit, it can charge much higher rates and will not face the same competition."If you make really crappy loans and charge a premium to people with nowhere else to go, you can make money really fast," Black said.Hudgins, the bank executive from Sarasota, said: "Why did loan officers make so many loans to people who had problems in their past? Because it helped them meet their quotas."

SEEKING ANSWERSThere has been a public vetting of the crisis by federal leaders — but nothing similar by the state of Florida.Instead of offering answers to the latest financial meltdown and solutions to prevent another in the future, Florida is headed in the opposite direction. The state cut the number of employees in the banking division by 10 percent, shut down four offices across the state and encouraged the exodus of that agency's most experienced examiners.In recent years, Florida lawmakers sought to make the state friendlier to businesses and loosen regulations on everything from hairdressers to auto mechanics.Now, the state's top banking regulator says there is no need to get tougher on the industry." ‘Tougher' is a hard word to use because we do live in a free-enterprise environment," said Drew Breakspear, the state's top regulator."Bank and other financial regulators must change so they do not stand in the way of banks."The Office of Financial Regulation sends in a team of examiners to state-chartered banks every two years to look into their operations. These reviews typically last three weeks and include a look at loan documents, meetings with bank leaders and reports on insider loans, deposit accounts and other factors that contribute to a lending institution's health.The examiners produce reports that become public only after a bank fails.Those documents were the basis of the Herald-Tribune's investigation, and they show how nearly half of the state's collapsed institutions broke the law, had excessive insider dealings or ignored basic banking practices.Some banks, for instance, did not conduct basic background checks on the riskiest customers. Others exceeded lending limits to insiders. Still others attempted to ward off the collapse by continuing to give money to borrowers — throwing good money after bad, regulators said — in order to keep loans from going into default.Eventually, default came for tens of thousands of borrowers. This set off a foreclosure crisis, made it more difficult to obtain a loan, and finally swept up small community banks whose balance sheets were overrun by bad loans."You can fudge things for a while by gaming and hiding but death is inevitable," says Black, the Missouri professor.